Zinc set to regain its glory in second half of 2017

After witnessing a spectacular bull run in 2016, Zinc slowed down its positive price momentum to a mere 8 percent on the LME and 4 percent on the MCX so far in 2017.

Zinc, the metal widely used in galvanisation of Steel, had a sluggish start this year following the massive 60 per cent rally on the back of major mine supply disruptions and expectations of deficit in 2016.

Steel prices, which were particularly hurt by sharp decline in its key input, coking coal and sluggish demand prospects in the first quarter, turned out to be the major bottleneck in the Zinc bullish story.

This was affirmed by Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute in Mar’17, who said that Steel demand in the world's largest consumer and producer, is seen easing by 1.9 percent to 660 million tonnes in 2017.

As a result, Chinese refined zinc imports in the first five months of 2017 plunged by a whopping 50 percent compared to the corresponding period of 2016 although figures improved significantly in April and May’17. Also, Chinese refined Zinc output surged sharply to 44,590 tonnes in June’17 from 41,300 tonnes in April’17.

Although the first half of 2017 did not do wonders for Zinc, the second half looks more positive already. Average Zinc prices on both LME and MCX so far in July 2017 are trading higher by more than 8 percent compared to June’17 all thanks to improving Steel fundamentals.

Earlier this month, Chinese Steel Rebar futures touched levels last seen in Jan’14 following infrastructure boost citing the ambitious Belt and Road initiative.

Another reason for this sudden turnaround is sharp increase in LME cancelled warrants. LME Zinc stocks, currently near 270,000 tonnes, are down by 37 percent and cancelled warrants (stocks earmarked for delivery) stand at a whopping 70 percent, indicating sharp tightness in the metal. Shanghai stocks, on the other hand, are not behind either as they too are down by 50 percent near 78,000 tonnes.

Not only this, the International Lead and Zinc Study Group (ILZSG) added that global zinc market deficit widened to 92,400 tonnes in April from a revised deficit of 72,700 tonnes in March.

In the first four months of 2017, the zinc market was in a deficit of 112,000 tonnes versus a deficit of 20,000 tonnes in the same period last year. Besides, zinc stocks at consumers, producers and in exchange warehouses fell to 1,260,400 tonnes in April from 1,355,100 tonnes in the previous month.

Looking at the broader picture, Zinc prices are likely to trend upwards in the coming months as tightness in the concentrate market following closure of major mines last year is going to move major consumers towards refined metal. This can be already seen in improving Chinese refined metal imports in April and May’17.

Apart from this, overall tightness in the market with regards to falling LME and Shanghai stocks will be supportive as well and will likely push Zinc prices higher towards Rs.190-195/kg in the near term. (CMP: Rs.182.30/kg)

(Kaynat Chainwala is Research Analyst- Base Metals at Angel Broking. Views expressed in this column are her own and do not represent those of ETMarkets.com. Investors should consult their financial advisers before taking any investment calls based on this article)